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Sarkozy: Germany, France want EU overhaul

ECB’s Mario Draghi calls for ‘new fiscal compact’

By

PolyaLesova

WilliamL. Watts

LONDON (MarketWatch) — French President Nicolas Sarkozy called for a major overhaul of the European Union on Thursday in response to the debt crisis roiling the region, as he also argued that France’s future was inseparably linked to that of neighboring Germany and Europe.

In a nearly one-hour speech in the southern French city of Toulon, Sarkozy said that France and Germany are advocating a new treaty that will reinvent the EU’s organization. He described the Maastricht Treaty from the early 1990s as “imperfect.”

“We should overhaul Europe urgently,” Sarkozy said. “If Europe doesn’t change quickly enough, global history will be written without Europe.”

Sarkozy will host German Chancellor Angela Merkel in Paris on Monday. The leaders will be making joint proposals for Europe, he said.

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Monday’s meeting will come ahead of a Dec. 9 summit of European leaders, which is being viewed as a make-or-break gathering as fears grow that the debt crisis could cause the breakup of the euro zone.

Sarkozy and Merkel last month promised to work on proposed changes to the EU treaty aimed at increasing fiscal coordination across the 17-nation euro zone and enforcing the currency’s rules on deficit and debt levels.

“Europe needs more solidarity. But more solidarity demands more discipline,” Sarkozy said on Thursday, adding that solidarity should not be an encouragement for some countries to take a lax approach to their finances. “Europe needs more political responsibility,” he said.

Sarkozy, who faces a re-election battle next year, also argued that “Europe doesn’t mean less sovereignty” for France. Germany and France have decided to merge their fate and there’s no going back on that strategy, he said.

The president also warned that Europe can be swept by the crisis if it doesn’t come to grips with it.

ECB is independent, Sarkozy says

Sarkozy’s speech late Thursday came after European Central Bank President Mario Draghi hinted that more help could be on the way in the fight to contain the debt crisis. The ECB has so far resisted calls by some politicians and economists to significantly ramp up its bond-buying efforts in order to keep the debt crisis at bay.

Sarkozy said Thursday that the ECB was independent and would stay that way. He also noted that no one should doubt the determination of the ECB to take responsibility for its part in helping to solve crisis.

In a speech to the European Parliament in Brussels, Draghi said agreement on a “new fiscal compact” that enshrines fiscal rules and government commitments would be “the most important element to start restoring credibility.”

“Other elements might follow, but the sequencing matters,” he said. “And it is first and foremost important to get a commonly shared fiscal compact right,” he said.

By saying other elements might follow, Draghi “appeared to be holding up the possibility of a greater degree of ECB intervention if euro-area governments were to commit, at next week’s key EU summit, to a tougher set of fiscal rules and enforcement of this with some degree of surrender of national fiscal autonomy,” said Julian Callow, an economist at Barclays Capital.

But economists said divisions still remain between Paris and Berlin over calls for closer fiscal union. French Budget Minister Valerie Pecresse on Wednesday showed reluctance to give the EU more power to enforce budget measures. Germany, on the other hand, regards Brussels oversight of national budgets as a crucial element in the fight to preserve the euro, noted Michael Derks, chief strategist at FxPro in London.

For his part, Draghi reiterated in his speech that the ECB’s interventions “can only be limited.” He also said the ECB was aware of the ongoing difficulties banks face due to stress on sovereign bonds, tight funding markets and scarce eligible collateral. The Federal Reserve, in a move coordinated with the ECB and other major central banks, acted Wednesday to slash the cost of swapping euros for dollars in the face of rising dollar funding tensions for European banks.

Barclays’ Callow said the overall thrust of Draghi’s remarks is that the ECB would be ready to step up significantly its bond purchases under the Securities Markets Program provided there is a “firm agreement” on a new fiscal compact at the Dec. 9 summit and the Italian government affirms clearly-defined plans to achieve a balanced budget by 2013.

“However, it is by no means certain that the EU summit will be able to achieve this level of commitment,” Callow said. “While we expect developments along these lines, there is considerable uncertainty about the precise outcome.”

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